Credit Mutuel AM: Diversification opportunities in emerging market equities
Emerging markets (EM) typically grow faster than developed economies, driven by a rising middle class and expanding economic infrastructure. In recent years, high U.S. interest rates have weighed on emerging market currencies, but the anticipated Federal Reserve rate cuts by year end should relieve that pressure.
That being said, one cannot ignore the recent geopolitical turmoil around global trade and that companies with high exposure to the US may face some volatility in the near term. A number of high-quality domestic leaders are leveraging these long-term trends which, from a global investor perspective, gives an opportunity to diversify away from the U.S. economy.
Among the EM universe:
- India, in our opinion, has the strongest structural growth story. Its expanding middle class is driving up domestic consumption, while the government’s ambitious infrastructure spending plans continue to fuel economic momentum.
- Since last September, the Chinese government’s shift in tone has increased our confidence in its commitment to resolving the real estate market crisis and supporting GDP growth. Although the market has started to rerate, we believe that valuations remain fairly cheap, and the prospect of fiscal and consumption stimulus makes us increasingly optimistic.
- Brazil weathered a perfect storm in 2024: political uncertainty over the budget, a depreciating currency and persistent inflation all led to several rate hikes. We now view valuations as potentially attractive and anticipate that rate cuts by year’s end—alongside growing interest from investors ahead of the 2026 Presidential election—could draw capital back into the country.
- Still classified within emerging markets, Greece offers one of the cleanest investment stories in the EM space. Political stability, fiscal discipline and EU-backed investments are underpinning GDP growth on top of a restructured economic foundation. In particular and in our opinion, the banking sector stands out: banks have only recently begun distributing the excess capital they built up during the sovereign crisis.
